The Future of P&C Insurance in Canada: Part 1 – Distribution

This article is the first in a three-part series on the future of P&C insurance in Canada. Throughout this series, we will explore how the sector is evolving within: (1) Distribution, (2) Pricing and Underwriting, and (3) Claims.

For many years, the insurance sector had been notoriously slow to evolve. Customers viewed insurers as difficult to do business with, while insurers saw little need for change. Products were largely commoditized. To “win,” many insurers had to form stronger relationships with brokers than customers to get a bigger piece of the pie, while sufficiently maintaining these key relationships to promote positive risk selection and maintain profitability.

What has changed in P&C insurance?

Over the past five to ten years, insurers reached a tipping point where fundamental change was inevitable. Legacy policy administration platforms were ageing and no longer supported, which exposed the sector to increased risk; insurers could no longer ignore the need for updated technology. Although the motivation for this transformation was to stabilize the business for continuity purposes, modernizing technology offered ancillary benefits in the hopes of creating more nimble and efficient organizations, supporting customer-centric cultures, and accelerating the pace of overdue innovation and change sector-wide.

Changes are the most apparent in the way insurers serve their customers. Customers can now interact with insurers in ways that they hadn’t been able to do in the past. Digital quotes are now virtually ubiquitous amongst carriers, and brokers and aggregators are evolving to enable digital purchases, though this is in its infancy in Canada. Moreover, insurers are beginning to offer customers the ability to service their policies online or through their mobile apps. Perhaps the most significant changes are emerging out of claims groups that are now starting to offer a complete end-to-end digital experience, which we will elaborate on in the third part of the series.

Insurers were late to the game, but they are beginning to meet the minimum expectations of customers in an ever-increasing digital world. Though many large-scale platform implementations are completed or underway, we’ve only reached the tip of the iceberg since many of these implementations are still going through growing pains for myriad reasons, such as:

• Large-scale programs have been descoped in this age of minimum viable product (MVP) to get the core system off the ground and meet time and budget constraints.
• Add-on technologies such as CRM and/or specific Insurtech products that will unlock benefits by integrating with core systems but were not included in the initial business case and require their own independent cases to get off the ground. In many cases, these have stalled or have their own long-term implementation time-horizon.
• Insurers continue to adapt their long-standing processes to new ones to meet the out-of-the-box configuration offered by vendors or pre-configured cloud-based system integrators.
• The transition from legacy to modern platforms is challenging. Moreover, converting policies from old to new is not without errors and inefficiencies when teams must work in two separate technology environments.

So, what’s next? Given the varying state of implementation, where do insurers go from here? What will insurers look like in the next several years? We’ll try to answer these questions in a three-part series of articles that take us through the insurance customer journey. Our first article will begin with how insurance distribution and service are evolving and keeping pace with customer expectations.

Distribution and Service

Insurance distribution models are evolving in real-time as insurers continue to consider their relationships with brokers, and to a lesser degree, aggregators. That said, any conversation about distribution needs to separate Personal from Commercial Insurance.

On the Personal side, the demise of brokers has been predicted for many years, figuring that consumers would flock to digital direct insurers or use aggregators as a broker substitute to receive multiple quotes concurrently. The problem is that the capability to complete the purchase, as mentioned above, is very new in Canada. As of today, very few insurers offer the ability to purchase a policy online. Most notably, Economical made a substantial investment into Sonnet as part of its strategy to demutualize. However, other incumbents have struggled to change to a direct purchase business model, as uncertainty still exists over Canadians’ appetite to bind a policy online without confirmation or advice from an expert first.

While new entrants, like Onlia, haven’t struggled with this model as much, they are few and far between. They are arguably set up for growth to capture a market segment that’s used to the immediacy of purchase and doesn’t have incumbents’ legacy baggage.

In the meanwhile, the economics of setting up a digital direct model can be challenging. To succeed, enough calls must be deflected away from contact centers to offset the investment required to complete purchases digitally. For broker-based insurers, this can be a scary proposition, as it can upset the broker apple cart, who fear anti-selection from their core business if they launch a parallel sales organization. Progressive brokers would prefer that digital sales capabilities are passed onto them to complete the purchase, on behalf of the insurer, through their broker site. However, investment in innovation is always a negotiation between the broker and carrier; each party feels the responsibility to move towards a more digital experience falls on the opposite party. However, this is delaying the inevitable. Eventually, insurers will reach a tipping point in moving to a predominantly digital-direct model as the following conditions are met:

• The cost of digital acquisition is lower than that through brokers, where savings can be passed onto consumers
• Scale and sophistication is achieved from digital marketing activities, mitigating the need for brokers
• Products (and their wordings) are simplified enough to be well understood at the time of purchase
• The quote journey is simplified as fewer questions are asked
• Consumers no longer feel the need to shop for what is essentially a ‘grudge purchase’
• Innovative competition becomes more prevalent from non-traditional players, such as automobile original equipment manufacturers (OEMs) who offer embedded insurance at point of purchase

One only has to look at the interest in Lemonade, south of the border, and realize that there is market demand for simple products that are easily understood, easy to purchase and affordable.

Providing digital channels for customers to self-serve simple transactions that would ordinarily generate calls to brokers or insurers is increasingly important. While mobile apps are an effective choice for banking, where customers who make frequent transactions benefit from an easy-to-use interface, mobile apps aren’t as obvious a choice for the insurer and insured relationship because the need to interact with insurers is much more infrequent. A better option than an app is an easy-to-use, mobile-optimized web-based experience that enables quick and easy customer self-service. Some of these self-service options include accessing policies in easy-to-understand language, downloading documents, making basic changes to personal information, and even making changes to coverage.

Carriers are not alone in their digital advancement, as many brokerages have also invested in their own capabilities to acquire and service customers. Digital brokerages, like Surex, have invested heavily in their own digital marketing capabilities and envision a future where searching for insurance online results in their websites being one of the top three sites listed in Google search results. These brokerages are looking to a future where they can become the one-site stop to obtain value from both price comparison and advice provided through an omnichannel experience.

That said, in Canada, there is a reluctance to engage digitally for more complex transactions, as consumers seek confirmation around their choices for both sales and service from a ‘trusted advisor.’  Other international markets haven’t experienced quite the same level of hesitation. In Canada, the result is a waiting game for consumers to catch up to the digital capabilities of insurers and for carriers and brokers to make the experience easy enough so that touchpoints to contact centers frontline employees or independent brokers are less necessary.  There is a strong belief that COVID-19 has accelerated these changes permanently, as insurers have invested more in these digital capabilities, and consumer behaviours have become even more digital-centric.

Things are a bit trickier on the commercial side as the risk exposure of businesses isn’t quite as commoditized as basic home and auto insurance. Markets can be segmented by customer size, industry, and location. For small and medium-sized businesses, obtaining appropriate coverage can be daunting when expertise within these organizations is typically outside of insurance. Given the advice that commercial customers require, brokers will have a dominant role in the years to come. The recent pandemic demonstrated this through the hard market, as insurance became more scarce for retailers and restaurants, many of whom couldn’t find any insurance no matter the price.

Commercial insurance isn’t without digital innovation. Direct to commercial consumers for small businesses like TruShield and APOLLO are eagerly trying to capture the micro-to-small business market. More traditional insurers have recognized that small business has traditionally been too time-consuming to quote, with little value in return. They have developed their own digital portals so that brokers can complete their own quotes and, in many cases, bind policies themselves without ever touching a human underwriter. Great for insurers, not so fast for traditional brokers.

This creates another problem. Although capacity has was created amongst the carrier community, it created extra work amongst brokers. With more and more commercial portals being developed by carriers, it means that brokers will need to fill out the same information multiple times or pre-determine where they would want the business to be placed. For many brokers, it was easier before the portals existed when they could simply blast emails with whatever information they had and then speak to an underwriter to complete a quote.

There has been progress in the commercial insurance space. Brokers such as Zensurance are creating a platform for businesses to get quotes digitally. Quotey provides a quick and easy platform for brokers to reach multiple markets. CSIO is creating standards for industry codes and APIs that should make the quote journey easier industry-wide.

That said, there are measures that insurers can take to make sure that the intake process is quick and easy and much more cost-effective than developing a proprietary broker portal. By employing AI-driven automation, insurers can streamline the intake and triage process to ensure the right risks are delivered to the right underwriter as quickly as possible. Automation can even pre-determine risk appetite so that underwriters don’t even need to touch the risk and can reject the time-wasting determination of whether something is even worth quoting. There will continue to be a need for commercial underwriters and brokers to discuss premiums and coverage for the foreseeable future. Still, the up-front piece of getting the risk in the door will not be nearly as time-consuming as it has in the past.

Long entrenched relationships with brokers have made the broker distribution model sticky. Some insurers are doubling down on the broker model to provide focus and clarity for the business. The reality is that brokers will continue to offer the most value where the insurance purchase requires additional sophistication and advice to complete a purchase. The industry has a way to go to simplify the product and journey sufficiently to make the broker obsolete.

As the relationship between customers and insurers continues to change, so too will insurance distribution and service. While self-service has become the norm in other industries, some insurance customers are reticent to cut out advisors. Similarly, some insurers are reluctant to move to a digital direct model because they are concerned they won’t realize the value of their investment. Changes have already come to insurance distribution in the US and UK, while Canada lags.

As Canadian insurers continue to simplify their products and make it easier to purchase and service policies online, Canadians will be ready to move with them.  Traditional brokers will be used for only the most complex personal and commercial insurance situations, as digital brokers and aggregators will facilitate price shoppers.  However, for insurers to offer simplified products requires additional advancement in pricing and underwriting models. We will explore these areas in more depth in the next article in our series.

By: Andrew Wolch, Practice Leader, Insurance